Why I Will Never Buy Dunkin' Brands Stock

Dunkin' Brands (NASDAQ: DNKN) has been steadily growing its store count in the United States and around the world. It added 71 new Dunkin' Donuts and Baskin-Robbins locations in the first quarter with 56 of those being in the U.S.

That's similar to recent quarters and it's a positive, but the chain has been struggling despite its growth. Its U.S. Dunkin' Donuts locations saw a 0.5% drop in comparable-store sales in Q1 while its Baskin-Robbins ice cream brand saw the same metric fall by 1%.

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Those are mildly troubling numbers, but sales aren't the reason I would never buy Dunkin' Brands stock. I'm passing on the company because it offers neither the best coffee nor the best doughnuts. It also lacks in service and its stores are not as comfortable as those of chief rival Starbucks (NASDAQ: SBUX). Those factors, plus increasing competition, make the company a hard pass, in my opinion.

Dunkin' versus Starbucks

My criticisms above could be labeled as personal opinion. I'm from Boston and have many friends who would rather drink vending machine coffee than go to a Starbucks.

Still, in my experience, which includes thousands of visits to both chains across multiple states, Starbucks simply executes better. Starbucks has a rigid consistency in how it makes its beverages -- at least in company-owned stores. If you ask for a grande Pikes Place Roast lightly sweetened in one store, it will taste exactly the same as it does in any other.

At Dunkin' locations, which are all franchise-owned, that's not always the case. "Light and sweet," a popular way to order iced coffee seems to have no consistent definition and while there are rules regarding how coffee is brewed and how long it can sit around, the taste can vary.

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In addition, likely because Dunkin' locations are not owned by the company, there is no standard for what employees get paid or what their benefits are. They also may have an advancement path if their franchise owner owns multiple locations, but it's not the same as the compensation, benefits package, and career path offered by Starbucks.

Again, this is anecdotal, but Starbucks' companywide efforts to attract and retain workers give it a better trained, more pleasant staff. That, along with its consistent, reliable coffee generally win my business.

The doughnuts are an issue

In New England, Dunkin' has managed to eliminate most competitors. Where opposition exists, however, it almost always offers a superior doughnut. Over the years Dunkin's doughnuts have gotten smaller and they don't compare well to higher-end chains like Voodoo Doughnut or Top Pot. In fact, a 2014 study conducted by The Daily Meal ranked Dunkin' dead last out of nine total on a ranking of U.S. chains with more than 15 locations.

It's worth noting that again -- many, including my 14-year-old-son -- would argue against this. Still, as an adult for whom a doughnut would be an indulgence, Dunkin's doughnuts are simply pedestrian, mediocre affairs.

How does this impact business?

Dunkin' faces an enormous amount of competition. It has to deal with Starbucks and its higher-end brand, but perhaps more importantly, it has to deal with McDonald's (NYSE: MCD). The fast-food chain has been investing in its McCafe brand and has frequently offered low-cost coffee to lure customers to try its hot and cold beverages.

McDonald's and even convenience chains that focus on coffee including Wawa, 7-Eleven, and Cumberland Farms can use coffee as a traffic driver. Since Dunkin' does not have a quality moat it's vulnerable to cheaper rivals.

None of this means Dunkin' has a bad business. It has a loyal customer base and a mix of good-enough products that help it succeed in new markets.

Its quality and increased competition, however, will keep it from making major headway in its same-store growth numbers. This is a chain that's going to have to fight for every sale and that's not an attractive proposition for me as a potential investor.

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